The importance of integrating ESG principles into corporate compliance policies

European institutions are increasingly focusing on sustainability in order to meet the Green Deal and make Europe the first climate-neutral continent in the world. Given the growing attention at various levels and the unique challenges for financial institutions related to ESG risks, there is a pressing need for the compliance function to (re)define its role, with the aim of ensuring compliance with ESG regulations and effectively managing ESG risks.

The existence of ESG risks requires supervisory authorities to act with greater urgency. We highlight the main challenges:

1. Financial institutions will need to measure and monitor the progress of ESG initiatives related to compliance. Companies must have a way to track their progress and ensure that the initiatives comply with any applicable standards or regulations;
2. ESG transparency is an integral part of responsible investment and corporate sustainability, but it is difficult to achieve, as ESG concepts are not yet clearly defined and require a careful approach, as we are measuring and monitoring non-financial data. For example, one of the risks is that misinformation or marketing techniques may present a financial product as more environmentally responsible than it actually is, potentially leading to cases of "greenwashing";
3. Companies must take into account the interests of shareholders as well as those of customers, employees, business partners, and other stakeholders to ensure that initiatives are successful and meet the expectations of all involved parties;
4. Due to the complexity and density of the legislative framework, it is very challenging not only to keep up with the evolving ESG landscape but also to determine the impact on the compliance function and the organization as a whole. Compliance functions must, therefore, be aware of the various laws and regulations related to ESG activities, as well as the potential financial, environmental, and reputational risks associated with non-compliance.

As part of an ongoing risk assessment process, attention should focus on the analysis of systemic integrity risk. Here, a foundation can be built to incorporate ESG risks into the compliance framework through the development of scenarios and the identification of ESG risks and mitigation measures. To take control, compliance should subsequently provide guidance to the first line of defense to contribute to a solid understanding of these risks within an organization.

The rapid evolution of the regulatory landscape also requires the compliance department to identify key processes and stakeholders that may be affected by changes in the expectations of regulators and supervisory authorities. Timely identification can help the compliance department develop plans to ensure that outcomes are not negatively impacted.

The unique nature of ESG risks and the accelerated pace at which changes are evolving allow the compliance function to position itself as a more proactive strategic advisor to the management body. It is responsible for contributing to the solidification of the definitions of the ESG factors themselves, which in turn helps to identify gaps in the ownership of responsibilities, stakeholder inclusion, and the capabilities needed within the company to manage ESG-related risks.

When an ESG strategy is properly defined, it can also have a positive effect on talent recruitment and retention, as well as fostering greater innovation and brand differentiation, in addition to the positive effects on the company's financial performance. It is also essential to create a culture of accountability and openness around ESG issues and to ensure that the company's ESG strategy is regularly reviewed and updated.

With this, it is emphasized that compliance should be a means, not a necessary end, for achieving ESG factors.